Financial markets have enjoyed an incredible run since last March. In the U.S., the enormous recovery resulted in strong overall returns in 2020. Despite recent volatility, the strength has largely continued into 2021. The U.S. market is now up over 20% since the start of last year.
What’s been driving the recovery in the U.S.? Where might things go from here? To provide some perspective, we caught up with Brad Willock, Vice President & Senior Portfolio Manager.
Why have markets performed so strongly over the course of the COVID-19 crisis?
The massive amount of monetary and fiscal support has been the main factor in keeping markets moving higher since March 2020. In the U.S. it currently totals ~$11.6 trillion, which is ~54% of U.S. GDP. For context, the stimulus package put together in 2009 after the financial crisis amounted to ~10% of U.S. GDP. The Biden administration has now proposed another massive stimulus package which may be passed in the coming weeks.
What about the impact of recent vaccine progress?
There have been several positive developments in the fight against COVID-19:
- The number of daily cases has sharply decreased since the start of the year.
- The number of daily vaccine doses administered has been steadily increasing.
- Just this week, Johnson & Johnson’s single-dose vaccine was approved in the U.S.
This should further accelerate the pace of inoculation. President Biden now expects that the U.S. will have enough vaccine supply for all American adults by the end of May.
What is the outlook for growth in 2021?
Economists are expecting economic activity levels in 2021 that haven’t been seen in over 20 years. The median projection calls for U.S. real GDP to grow by more than 4% in 2021. Historically, when real GDP growth exceeds 4% it has led to extremely strong S&P 500 earnings growth. This is consistent with analyst expectations which call for S&P 500 earnings to grow by over 20% in 2021.
What near-term risks are you watching?
Inflation is the largest near-term risks for investors. For context, the Fed has a mandate that focuses on full employment and inflation of 2% over the long run. Given there are still millions of people unemployed in the U.S. and inflation is below 2%, the Fed can remain accommodative at the moment. However, with the massive amount of stimulus and most commodity prices on the rise, inflation will likely be above 2% in the coming months. We expect the Fed to claim that the uptick in inflation is temporary and to remain accommodative as it focuses on the employment part of its dual mandate.
What is your outlook for U.S. equities?
S&P 500 earnings will largely depend on the level of stimulus and the pace of the re-opening as determined by the virus and the vaccine rollout. The price-to-earnings multiple (the price the market is willing to pay for earnings), will likely depend on the Fed and the markets view on if/when they will stop being accommodative. In a bull case scenario, we could see continued robust earnings growth and elevated market valuations that could produce high single to double-digit returns over the next year. Of course, there are a broad range of potential outcomes and we are constantly monitoring new developments.